Desired Cash On Cash Return for a Rental Property

[Kevin Castaneda]

What Cash-On-Cash (CoC) return do you like to see on your rental properties, and at what point in your loan term do you calculate your CoC from when deciding a property is worth purchasing?

I'm doing some returns base-lining for SFR rental properties in my local area which happens to be San Antonio, Texas. Lots of BP investors say they're getting +20% Cash-on-Cash (CoC) returns on their rentals but never describe how they get their calculations! For example, maybe they're not including CAPEX or property management costs and are effectively "inflating" their calculations! I for one think you should always include repairs/maintenance, vacancy, management, and CAPEX in your calculations ....While high returns like this sound great outloud, I'm also skeptical since the CoC percentage can be so greatly influenced by refinancing to a small investment basis (eg. BRRRR strategy). While CoC returns can be extremely high with a small investment basis, over time this percentage will shrink closer to your property's Cap Rate.

So, how do you approach CoC to determine if an investment is worth your time? Or you focus on a high Cap Rate since this number is closer to the CoC percentage you'll get once the property is fully paid off?

[Rick Pozos]

IF you are doing rentals of single family or 2 to 4 units, cap rates are not used at all. Buy and hold is not something that you really need to look at as a cash on cash because, yes it will change over time. If you have a big repair you may be negative for the year, what if you have another one next year, BAM two years with a zero or negative return. That does not mean that the deal is not a good one. Things happen. You want to prepare for them by thinking about capex, maintenance, property management, etc. The whole goal is to get to the point where there is no mortgage and you have some big time cash flow. And not on one or two properties, but 10 or 15 or more.

I look at a property that will cash flow about $200. per month. If you are getting an investor loan with 20% down, it should cash flow more like $300 or $400 per month. The cash flow should not be used except for the property. That is your "other" retirement account. If you have to make some small deposits over the years, so be it. Hopefully after 5, 10 or 20 years there will be plenty of equity AND cash flow for retirement.